AP-IV Supply and Demand

Notes: 007-10
Vic Byron D. Zarate
Demand is the expression in the market of
the cumulative willingness of all consumers
to buy various amounts of product at various
prices
-It is the schedule of various quantities
of commodity which buyers are willing and
able to purchase at a given time, price, and
place
Factors that determines Demand
-Income
-Given price
-Population
-Price of related goods
-Taste
-Preference
-Price expectation -technology
In general, consumers most likely buy more
goods and services as price decreases law
of demand states that As price increases
the demand decreases and increases as the
price decreases
Demand Curve depicts demand in a
graph, with the price of goods on the vertical
axis and the quantity of the goods demanded
per unit time on the horizontal axis.
Demand Schedule Is a list reporting the
amount of good demanded per unit time in a
market at various prices.
Demand function A mathematical that
explains the demand

Figure 1 Demand for Pandesal at various price

2
1.75
1.5
1.25
1
0.75
0.5
0.25
0
0

100 200 300 400 500 600 700 800 900

Figure 1 Demand for Tomatoes at various price

4
3.5
3
2.5
2
1.5
1
0.5
0
0

200

400

600

800

1000

Market Demand (referring to the demand

curve) shows the amount of a good that all
households together will buy at each
different prices
Quantity Demanded - the amount of
goods that will be purchase in the market at
the given price
Demand Function (base on the graph)
shows the inverse relationship between price
and quantity demanded

Ceteris Paribus Assumption Non-price

factors
Normal Good is one for which an increase
in income leads to increase in the quantity
demanded, other thing equal
Inferior Good is one for which an increase
in income leads to a decrease in the amount
demanded, other things equal
Elasticity Demand
- Describes how quantity demanded
reacts to changes in Price
- Refers to the reaction of buyers to
the changes in price
- Is the percentage change in quantity
demanded divided by the percentage change
in price for two points in the demand curve
- ED=% Q=100(Q2-Q1/Q1)
%
P 100(P2-P1/P1)
ED-Elasticity Demand
Q-Quantity
-Change
P-Price

Types of Demand Elasticity

1. Elastic Demand The varying response to
a price change of quantity demanded is
significantly to great
- Price and Total Revenue are opposite,
When Price falls the Total Revenue Increases
and when Price increases the Total Revenue
decreases
P
R
I
C
E
Quantity
Income Elasticity of Demand Measures
the responsiveness of quantity demanded of
a good to change in quantity demanded of a
good to changes in the income of consumers
who buy it.
- In 1% increase in income is
computed for each of the following major
expenditure groups
A. First Priority Items
1. Personal effects
2. Education
3. Gifts and contribution

4. Recreation
5. Transportation/ Communication
6.Furnishing/ Equipments
B. Second Priority Items
1. Shelter
2. Personal Care Products
3. Clothing
4. Housekeeping Items
5. Medical care Products
6. Special occasions
C. Third Priority Items
1. Tobacco
2. Utilities
3. Food
4. Alcohol Beverages
Ernest Engel Hypothesis If the income of
an individual or a family increases the
demand for food increases at a slower rate
2. Inelastic Demand A condition when a
change in price result in a lesser change in
quantity demanded, When price elasticity is
less than one, it is said to be inelastic e.g.
Gas, Electricity, LPG, etc.
- Price and Total revenue change in the same
direction, As Price increases same with Total
Revenue
P
R
I
C
E
Quantity
3. Unitary Demand A change in price
correspondingly result in a equal change in
quantity demand
P
R
I
C
E
Quantity
4. Perfectly elastic demand without change
in price there is an infinite change in quantity
demand
P
R
I
C
E

Quantity
5. Perfectly inelastic demand A change in
price creates no change in quantity
demanded
P
R
I
C
E
Quantity
Determinants of Demand/ Demand
Shifters
1. Taste The consumers preference for the
new product, the product is more desirable .
- increase of demand will shift the
demand curve towards the right and
decrease will shift towards the lift
2. Number of Buyers Consumers will
eventually determine the demand, a
community with increase population will
increase the demand
3. Income Determines the purchasing
power of the consumer, Rise in income will
increase the demand
Normal good Commodities whose demand
varies directly due to the change of income.
aka Superior good
Inferior good Commodities whose
demand varies inversely due to the change
of income
4. Price of Related good because of
Substitution of product then there will be
also changes that may occur subject to
change of the primary good
- Substitute-one that can be used in
place of another good. When two products
are substitutes, the price of one and the
demand for the other move in the same
direction. eg. Nike and Reebok; Honda and
Toyota, Cola A and Cola B
- Complements-Are goods that are use
together with another good (They are usually
demanded together) E.g. Cameras and film,
Device and Gadgets, Tuition fees and
Textbooks
- Unrelated goods-A change of price of
one good does not affect the other. E.g.
Effect of the rise of vegetables with playing

golf. The sale of automobile with the drop in

salt supply
5. Expectation Satisfactory of the
consumer, to meet its utility. Anticipation
may change the demand curve for example
Typhoon forecast by the weather bureau,
limited production of rice,
- expectation to have an increase of
allowance will able the consumer to buy
more goods
* Any Change in the determinants of
Demand will Change the Demand curve
which means that it alters the schedule that
the curve may shift either to the right or left.
E.g-Consumers dont like harry potter films
anymore
*Change in Quantity demand designates the
movement from one point to another or from
one price quantity to another in a fixed
demand schedule. E.g.-Price of Tomatoes
declined to P3/kg.
Computation in Elasticity of demand
P 200
A
R
I
C 198
B
E

Quantity 1,000
1020
What is the quantity demand from point A to
point B in the graph?
E = % Change in quantity demanded /
%change in price
E = 100(1020-1000)/1000 = 2 = -2
100(198-200)/ 100
-1
Interpretation : In 1% fall of the price of the
commodity there is 2% rise on the demand
quantity
p 10
r
i
c
e
5

5
10
Quantity
If point A is 9 and point B is 4 with the
quantity of 3.5 and 6.5 respectively what will
be the elasticity of demand from point A to
point B
E = % Q = 100(Q2-Q1)/Q1
% Q 100 (P2-P1)/P1
E = 100(3.5-6.5)/6.5 =- 46.15
=2.7
100(9-4)/4= 125
: 46.15% change of price (decrease) in price
will have 125% increase in the quantity
Given: Crude oil as the major transport
commodity has the following demand
schedule
45
40
35
30
25
20

15
2000 2500 3000 3500 4000 4500
5000 5500 6000
Price Demand(by 1000)
24
5,898
28
5,260
30
4,678
32
4,150
34
4,000
36
3,680
38
3,457
Questions: Plot the schedule on a graph
: What type of demand is illustrated
: What is the elasticity of Demand
from P4-P5
: Interpret your solution
Problems: A certain business has the
following demand schedule, Complete the
table below by computing the % change of
price and quantity from every change of
price
5pts.
5pts.
5pt.
Price
Quantit %chan
%chan
Elastici
y
ge
ge
ty

Price
8
22
9
24
10
23
11
20
12
15
13
10
14
8
Interpret your graph (5pts.)

Quantit
y

Deman
d

AP-IV Supply and Demand

Notes: 008-10
Vic Byron D. Zarate
Supply is the expression in the market of
the cumulative willingness of all firms to
produce various amounts of a product at
various prices
- As Price increases the quantity
supply also increases and decreases as the
price decrease, The direct relationship of
Price and supply is called the law of Supply
Supply schedule and Supply function
just as demand can be described in graphical
information in a table(Supply schedule) or
in a mathematical formula (Supply
Function), supply can be obtained in same
manner as demand
Market supply/Supply curve Shows the
amount of good that all firms together will
produce at each different market price
Quantity Supplied The quantity of good
that all firms together will produce at a given
price
Price

P3
P2

- Operates at the law of supply and

demand
: Price = Demand + Supply; supply will
increase
: Price = Demand + Supply; supply will
decrease
Supply and demand schedule showing the
equilibrium price or market price
Price
Demand
Supply
10
50
10
20
40
20
30
30
30
40
20
40
50
10
50
Shortage
Equilibrium
Surplus
It is shown in a graph
50
P
Supply
R 40
I 30
C
E20

Surplus
Demand

Equilibrium

Shortage
10

P1

10

20

30

40

50
Quantity supplied Q1
Q2
Q3
The graph may show the following
: At market price P1, Quantity supplied is Q1
: At market price P2, Quantity supplied is Q2
: At market price P3, Quantity supplied is Q3
Effects of price
: If price falls from P2-P1, Quantity supplied
will fall from Q2-Q1: a lower quantity will be
supplied
: If price rises up from P1-P3, quantity supply
will rise from Q1-Q3: Quantity supplied will
be higher

Market Equilibrium It is a situation where

quantity supplied and quantity demanded
are equal

Quantity
Profit difference between total revenue
from the sale of goods and services and the
total cost incurred in producing and selling
these goods and services.
Profit = Total Revenue (TR) Total Cost(TC)
Therefore: With TC Constant; Increase TR
: With TR constant; decrease TC
: Increase TR; decrease TC = Increase
Profit
Mark up Fixed Profit
Price of a commodity = Mark-up + Average
cost
Total profit = Profit per unit x Total quantity
sold
Application:

Mark up = Estimated Profit /Total

quantity Average cost (total cost/Quantity)
To account for your profit in selling colas
(12oz.) in a Sari-sari store and how much will
you sell each colas
Given : Number of bottles = 1000
: Estimated income 15,000
: Cost / bottle P10
Sol. Mark up =15,000/1000 = 15-10 = 5

Types of Elasticity of Supply

1. Elastic Supply

The response of the producers in response to

increase of price, e.g. these can happen if
the producers makes a temporary decrease
on the quantity supplied
2. Inelastic Supply

Change in prices will result in small change

in quantity supplied e.g. when producers are
dependent from natural resources (Primary
Industries)
3. Unitary Supply

Equal change in supply and demand (market

equilibrium) Subsistence economy
4. Perfectly elastic Supply

Without change in price (constant) infinite

change in demand e.g. Fixed wages will
increase the supply for laborers
5. Perfectly inelastic supply

Change in Prices will not affect the quantity

supplied. E.g. Stamps, coins, paintings
Determinants of Supply
1. Price of resources The price of resources
use in the production helps determine the
cost of production incurred by firms. E.g. If
prices of seeds and fertilizers decrease we
expect that the supply of that particular
goods will increase, conversely an increase in
resources price will raise production cost and
reduce supply
: Shifting of the curve to the left
Dependent on the source for production e.g.
Fertilizers and seeds will affect the
production of agricultural products
2. Technique of production
Improvements in technologies enables firms
to produce units of output with fewer
resources thus it will result to increase
quantity supply reducing the price
Cost for equipment for production will alter
the cost of production e.g. Man made vs.
Machine made
3. Taxes and subsidies Business treat
most taxes as cost; an increase of sales will
increase production cost and will decrease
the supply, Subsidies are taxes in reverse
4. Prices of other goods Firms producing
a particular product, can produce other
products. Like those producing Taho can
produce Tokwa so when taho is not buyable
during rainy season then the firm will
produce Tokwa to increase profit and taho
will decrease its supply and Tokwa will
increase in suply
5. Price expectations Due to price
expectation producers tend to hold their
product to fake shortage, and decrease
supply will eventually increase demand and
Price and as prices increase supply is release
in double however the production cost will
increase with the increase of supply which
will result to increase total revenue
6. Numbers of seller in the market
(Supplier) Increase sellers will increase

the number of supplier and will increase

supply, Price will decrease
: Competition will be the result
: The source of raw material will
dwindle rapidly
: E.g. Furniture production will
consume timber
Changes in Quantity Supplied: The
distinction between a change in supply and a
change in quantity supplied parallels that

between a change in demand and a change

in quantity demand. Because supply is a
schedule or curve, a change in supply means
a change in the entire schedule and a shift of
the entire curve. An increase in supply shifts
the curve to the right and decrease will shift
the curve to the left. The cause of a change
is a change in one or more of the
determinants of supply.